Divide over 'fiscal cliff'

Trading action on Wall Street is likely to retain its tentative edge over the new year, as uncertainty over the United States' financial future and its economy casts a pall over the market.

Investors are sticking to the sidelines, as political wrangling over the "fiscal cliff", a combination of federal spending cuts and tax increases scheduled to start next year, continues to divide Congress and the White House.

The possibility of a compromise is keeping traders on edge, with the stock market likely to remain volatile until the matter is resolved. Economists have estimated that the fiscal cliff could tip the US back into recession at a cost of US$800 billion and 3 million jobs.

Wall Street is likely to be weighed down further by "market seizure", according to John Woods, Asia-Pacific chief investment strategist at Citi Private Bank. "This is characterised by a lack of investor conviction, directionless price action and weak liquidity," he says.

"It's hardly a surprise that with the year-end fast approaching and, as the latest risks associated with the euro zone and the fiscal cliff intensify, positioning among money managers has become ever lighter as risk assets are unwound, by some accounts to three-year lows."

The re-election of President Barack Obama had the effect of returning a long-deadlocked government, with US stocks factoring in the political stalemate in the wake of the election: the Dow suffered one of its worst weeks of the year.